Up against the ATO in court – not so scary
Recently, the ATO has become aware that it is not that popular. There are allegations that the ATO uses its deep pockets to bully taxpayers out of going to court. There is an impression that only the big boys can take on the ATO.
Well, apart from the fact that the ATO is indeed not liked by some, the rest is untrue. The ATO has a budget and for the money it is given its job is to extract as much tax as it can get out of you. Going to court is not what the ATO wants to do because:
It is expensive.
It may lose and set a dangerous precedent for others to follow
My twenty years of practice has seen improved communication with the ATO. It seeks negotiation and alternatives to litigation (going to court). If you put up a strong argument and defence early the ATO often backs down – and looks to easier marks somewhere else. The ATO would rather attack foolish or scared taxpayers. Such taxpayers are more likely to pay more tax than they have to.
The ATO continues to put out publications on how it conducts litigation. It continues to increase transparency in how it administers its litigation programme. The publications show how the ATO conducts litigation and why it litigates particular matters.
Practice Statements
The ATO has responded to criticisms of its litigation practices made by the Inspector-General of Taxation. The ATO puts out Practice Statements setting out how it undertakes litigation.
Background
In my view, the ATO suffers from 5 problems:
ATO has a God Complex - The ATO is not the government and it is not a judge. Governments make laws. Neither Brett Davies Lawyers nor the ATO are the arbitrators of the law. While both take positions, only the court has the final say. While the ATO is forever trying to interpret the law – it can be, and often is wrong. We have found from our own experience that the ATO only has a 50/50 chance of winning in the Administration Appeal Tribunal (AAT). The ATO is being condemned by courts because of this arrogance (e.g. Indooroopilly decision).
Fatal belief in being omnificent – The ATO behaves as though it is all seeing. It acts as though it knows how you think and why you acted in a certain way. It takes wild guesses to what the facts are.
Litigation is random - The ATO should develop a formal and consolidated published policy or guideline on tax litigation which states that the primary aim of litigation for the ATO is to resolve disputes in a fair, timely and cost-effective manner, consistent with the rule of law.
Litigation often goes off the rails - The ATO should introduce risk management techniques to its management of tax litigation issues. This process should start by defining the scope of the Commissioner’s and the ATO’s legal risk in collaboration with the Australian Government Solicitor (AGS) and Counsel.
Funding test cases is bias - The ATO should continue to fund test case programmes that clarify uncertain law - including paying a taxpayer’s legal costs (where it is fair and in the public interest for the ATO to do so). http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/57395.htm
Over time the ATO is taking on board many of these problems.
ATO explains its view on a court case decision -
PSLA 2007/2 – Management of decisions of courts and tribunals
Win or lose in court, it is important that the ATO explains its new or confirms its existing position. The ATO now is obliged to explain how it interprets a decision.
The ATO now publishes a ‘Decision Impact Statement’ within eight weeks of the decision being handed down. A Decision Impact Statement sets out the ATO’s view of the decision – including impacts on Public Rulings.
Arrogantly, and this really shows the God complex, the ATO states "In administering the law there will be rare instances where the Tax Office will maintain a position that is contrary to an existing Court or Tribunal decision." This is much like a criminal who states “look I appreciate you have pinged me for murder, but shucks, my lawyer is going to put this on appeal, so I will toodle off and see you in 2 years time for the appeal”. It just doesn’t happen, except with the ATO – perhaps it is god.
How the ATO conducts itself in litigation -
PSLA 2007/12 – Conduct of tax office litigation
PSLA 2007/12 sets out how the ATO conducts itself in court cases.
The ATO argues its cases consistently with its published views of the law. At Brett Davies Lawyers we hold the court to that. Often it wants to stray and change its position. We spend a lot of time always knowing the ATO views on the issues. We ensure that the ATO does not put arguments contrary to those views simply to succeed in a particular matter.
Emphasis is placed on resolving disputes through consultation, negotiation, and alternative methods of dispute resolution. This assists matters in coming to an acceptable resolution without having to go to the expense of a hearing. Irrespective of how good we or the ATO think our cases are - going to court is sometimes an uncertain lottery.
Going to court has to be morally right and commercially viable
PSLA 2007/16 – Risk management in litigation
The ATO is forced to address its litigation strategy and risk. It looks at:
What is the legal risk? Has the ATO interpreted the act correct. Is the procedure uncertain?
If it doesn’t take it to court how much revenue for the ATO is at risk? What is the scale of the perceived threat? For the tax effectives the ATO was going for broke. With practices that are not widespread or not used the ATO has less reason to fight the good fight.
Can the ATO sustain the operation? Does it have individual capability, availability and systems?
How wide is the compliance risk? Is everyone involved in the same heinous crime and it needs a good court case to bring discipline back into the market place?
Reputational risk? Is attacking an old lady that is good and kind going to embarrass the ATO, or the puppet master: Treasurer. Or the government? Although a different government agency, why was the proceedings discontinued against Richard Pratt two days before he died of cancer?
At Brett Davies Lawyers we hunt down and explain these risks to the ATO. Thus we increase the opportunity to negotiate a favourable settlement with the ATO.
“Model litigant” – the ATO as a beacon of light
PSLA 2007/17, 18 and 19 – Tax technical litigation in the AAT, Federal Court and
High Court
About 85% of all tax cases are in the Administrative Appeals Tribunal (AAT). The ATO has to communicate and follow correct procedures. It is a “model litigant” in that it follows the laws, policies and guidelines. It also outlines the ‘best practice’ procedures for its officers in the AAT. (PSLA 2007/17)
Some cases are appealed from the AAT to the Federal Court. Some are even appealed to the highest court in the land being the High Court. PSLA 2007/18 details the process and requirements for such appeals.
At Brett Davies Lawyers we can often fix fee the whole process – from audit to objection to AAT.
Just have your accountant, financial adviser or lawyer ring for a confidential discussion.
Brett Davies (08) 9325 8033 or 0419 980 972
Thomas Henn (08) 9325 7999